Today’s Blog – Thursday 24th December 2015

In recent days the international media has reported on rumours that PRC Government controlled NOC behemoth, Sinopec, is planning the takeover of large independent US oil company, Anadarko Petroleum.

Readers may recall that Anadarko was itself recently rebuffed by slightly smaller US independent, Apache Corporation, following its takeover approach. We speculated at that time that a key reason for Anadarko’s approach was to protect itself against potential predators such as Exxon Mobil.

We had not considered the likes of Sinopec as a predator for Anadarko. Our view is that such a deal is highly unlikely. Those with memories of ten years ago will recall the political barriers that prevented Sinopec’s Chinese NOC cousin, CNOOC, from taking over US company Unocal.

The politics now are arguably tougher. A highly contested US presidential race is under way and a PRC takeover approach to Anadarko would absolutely find its way onto the agenda there.

Furthermore, Anadarko arguably has a unique poison pill in its asset base in the US – several million acres of freehold or “fee” land in the likes of Colorado, Wyoming, Utah, etc, that was acquired more than 20 years ago from Union Pacific railway (who was itself granted this by Washington in the Nineteenth century).

One can imagine the local and national political implications if the PRC Government was to acquire a perpetual interest in this massive land and minerals rights position (and one can also imagine that the PRC Government would never let a foreign Government or company acquire a similar position within its own borders).

We consider that a far more likely takeover target for Sinopec would be Origin Energy’s (ORG) LNG assets in Australia. Sinopec is already a partner therein, we consider that ORG is a likely seller next year, the politics should be manageable, the deal is more bite-sized, etc.

Commodity prices

Oil prices have recovered from their 12 year lows that were hit on Monday over the last couple of days, partly based on positive “numbers” and partly as a normal market bounce (although probably of the dead cat variety).

Yesterday Brent closed at US$37.76 and WTI at US$37.88 (that is right – the normal spread seen over the last few years has gone negative).

The BHI rig report came out early this Christmas week, which thankfully returned to “normal”, with oil rigs falling 3 and gas rigs 6.

The EIA’s weekly report also came out early and was the key driver in higher crude prices. It showed a higher than expected crude inventory draw of 5.9 mmbbls and a net product build of only 0.4 mmbbls.

Henry Hub also bounced up sharply, closing at US$1.99. Not quite Christmas cheer for the hard pressed gas producers but at least something.

“It’s wretched, it’s miserable, it’s lousy, it stinks. There’s way more gas than there is demand…it’s like oil!”

However, one spark of light amongst the LNG gloom – apparent progress from the Gorgon LNG project in terms of securing another customer (although the reverse silk lining is that every such deal for a developed project means one less potential customer for the “100” projects looking to FID). This was the inking of a Heads of Agreement with Chinese state owned power utility China Huadian, for 1 mtpa for 10 years.

Company news – ORG

A couple of days ago ORG announced that it had purchased some crude oil put options to underpin its APLNG revenues in fiscal year 2017. The put prices for 15 mmbbls are A$55 for 75% of this volume and A$40 for the balance.

ORG said that the cost of the puts is A$82M “after tax” (which means A$117M in cash).

Some might say that ORG should have done this a couple of years ago. However, it still seems prudent to do so now, particularly in a world where the Goldman Sachs US$20/bbl scenario seems increasingly plausible. We would expect others in a similar position to ORG, such as Santos, to also be planning similar hedging moves.

Company news – Carnarvon Petroleum (CVN)

Some good news on the exploration front from CVN – the sort of good news which would send share prices soaring a couple of years ago, but which at present tend to get lost in the oil price mire.

This was the identification of a 40 M light oil bearing column in the Roc-1 well (operated by PE owned Quadrant Energy off Western Australia’s north coast). The well is drilling ahead to target depth of nearly 5,000 M and further testing will take place after that.

Quote of the day

We have to finish the year with our most fertile quoting source (other than possibly Edmund Blackadder): The Donald.

No doubt jealous of President Obama’s recent chip-in from off the green, The Donald successfully managed to dog whistle to his stereotypical old/poor/white/etc followers about race and associated laziness, etc, with the following:

“It was reported today [Obama] played 250 rounds of golf and he’s going to be in Hawaii, I think did they say for three weeks? Two hundred and fifty rounds, that’s more than a guy who plays in the PGA Tour plays. He played more golf last year than Tiger Woods”.